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Turkey
Power
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PRE-RELEASE | TURKEY POWER 2015
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The state, the market,
and the state of the market
Opportunities in the Turkish energy sector in the context of sector reform
Emerging markets, even those that seek to
defy it, are inextricably the product of their
past. The role that the legacy of bureaucracy
plays in shaping institutional power structures and the way in which cronyism manifests itself are determined by the historical
shape of a country. Real junctures in a country’s development are rare. Opportunities for
a country to decidedly separate itself from
the past – to reform, transform and democratize it – do not come often. Turkey, and as
an extension of it the country’s energy sector,
has long stood at one such juncture.
Today, the path which Turkey chooses will
determine the country’s ability to answer
one of its most pressing macroeconomic
concerns: the dual challenge of possessing
one of the world’s most rapidly growing energy markets while containing little known
hydrocarbon resources. Already this dilemma has built a $42.9 billion current account
deficit. Of equal importance to the current
political administration, the path which Turkey chooses at this juncture will also determine to what extent the country is capable
of accomplishing its Centennial Goals, one
of current Turkish President Recep Tayyip
Erdoğan’s flagship projects. More ambitious
than realistic and stemming from Turkey’s
larger goal of becoming one of the world’s
ten largest economies by 2023, these targets
for the energy sector include the establishment of 20,000mW of wind energy, 600mW
of geothermal energy and the construction
and operation of three nuclear power plants
within the next eight years. The extent to
which Turkey will be able to progress with
these projects will be shaped by its ability to
reject its past.
Though the modern structure of Turkey’s energy market was first formally established in
2001 through the creation of Turkey’s Energy
Market Law, the dynamics underscoring the
Turkish energy sector of today far predate
this, tracing their roots to the first point in
modern Turkish history where the country
came across another such a juncture in its
development: the establishment of the Republic of Turkey in 1923 led by Mustafa Kemal
Atatürk, the Republic’s first president whose
theory of social and political governance has
dictated the course of the country’s growth
until now. Advocating a statist approach to
economic planning, Atatürk established the
political structures that would guide the expansion of Turkish energy; structures that
only today are finally being dismantled. Public works established the early rudiments of
Turkish energy, constructing many of the
country’s largest power generation facilities,
including the eponymously named Atatürk
Dam, which currently generates 8,900mW
of energy annually and stands as one of the
world’s largest hydroelectric power projects.
Only in 2004 did privatization begin for the
energy sector in earnest.
Murat Çolakoğlu, partner at PriceWaterhouseCoopers explained: “The late 90s were
marked by a fundamental need for more energy production facilities. Greenfield investments were needed to address an issue that
underscored many Turkish industries: the
need for a consistent and secure power supply. This was reflected in strong incentives
issued by the central government and the
Combined cycle power plant. Photo courtesy of Bis Energy.
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proliferation of build-operate-transfer (BoT)
financing models. Later, BoT investments fell
out of favor; the burden they placed on the
public sector was too heavy to be sustainable. These models were all but completely
abandoned ten years ago.”
In their place, the state began targeting its
most inefficiently operating and cash-hungry
assets for privatization. Foremost among
these projects was the country’s electricity
distribution network. Divided into 21 separate distribution regions, Turkey’s electricity
distribution networks were fully privatized
at of the end of 2013. Concurrently, the state
also began to undertake the privatization of
its assets in generation. Focusing, logically,
on its portfolio of natural gas-fired power
plants and small-scale hydropower projects
instead of its more profitable large-scale hydroelectric power plants, the Privatization
Administration commenced privatization of
its assets in power generation in 2008.
A decade on, the benefits of this policy are
clear. Collectively through the sale of both
its assets in distribution and generation the
state was able to realize proceeds of over $20
Billion. Liberalization also allowed for generation to rise significantly. Ahmet Aksu, president of the Republic of Turkey’s Privatization
Administration said: “Previously, there was a
market where the state was the only actor. In
2001, the capacity of electricity generation in
Turkey was 28,000 mW; however, today it is
around 70,000 mW. This alone proves that
the model undertaken in Turkey has been
successful.”
Considerable successes indeed, yet to assume that these developments have meant
that the state no longer plays a considerable
role in the development of the country’s energy sector would be incorrect. Ankara remains
the energy market’s chief director and largest
stumbling block. This is observed in the two
vestiges of the old regime that remain within
Turkey’s energy sector, the most obvious of
which is found in the continued presence of
the state in generation, transmission, and
the country’s natural gas market. Through
State Hydraulic Works, the Turkish Government continues to operate 53 of Turkey’s
135 installed hydroelectric power plants,
accounting for 10,215 mW of the country’s
total generation capacity. More critically,
however, the government continues to also
control BOTAŞ, the organization that holds a
monopoly control over Turkey’s natural gas
TURKEY POWER 2015 | PRE-RELEASE
market. With over 50% of the Turkish market
depending on natural gas-fired power plants
for electricity, the success of the Turkish government in transforming its energy market
cannot be assessed without understanding
the implications that the state’s control over
the natural gas market has had on the development of the country’s energy matrix.
Eser Ozdil, secretary general of PETFORM,
an organization involved in petitioning the
government with private sector concerns for
those involved in the exploration, production, processing, storage and transmission
of crude oil and natural gas, explained the
implications of that this has held: “Owing to
its vertically-integrated nature, BOTAŞ holds
control over 80% of the wholesale market.
This is in addition to its position within gas
importation – it controls 75% of total imports
– and transmission, for which it acts as the
country’s sole operator.
‘The problem that this structure creates is
most evident in the case of those that must
compete against BOTAŞ in importing natural
gas. These companies must sign an agreement with BOTAŞ to transmit their gas as
BOTAŞ controls the country’s pipeline network – yet they must also compete with
BOTAŞ. This is already an uneven playing
field as BOTAŞ also subsidizes gas prices in
the domestic market.
‘Those operating pipelines should function
independently. All data related to the trade
of energy and natural gas should also be
made publically available. Otherwise private
sector involvement is purely speculative. But
in Turkey, unfortunately, our transmission
system operators are not independent. We
cannot even have a benchmark price for energy and natural gas because the price which
BOTAŞ chooses to set, by default, becomes
the benchmark price. For Turkey’s energy
market to mature, the privatization of BOTAŞ
is sine qua non.”
Önder Karaduman, chairman of the board
at Turkey’s Electricity Producers Association
(EÜD), confirmed: “It is impossible to discuss
the state of Turkey’s energy market and claim
that it is healthy when natural gas prices are
not subject to market forces and not the
product of market competition. BOTAŞ must
be disassembled.”
One of the most tangible ramifications of Ankara’s continued control of the country’s gas
market is exhibited in the country’s inability
to translate the changes that have occurred
Ahmet Aksu, president of the
Republic of Turkey’s
Privatization
Administration
Önder Karaduman, chairman of the
board, Turkey Electricity
Producers Association
(EÜD)
in the global market for hydrocarbons since
oil and natural gas prices begin to fall last
year into lower prices for natural gas within
the domestic market. Sinan Ak, general manager of Zorlu Energy, one of Turkey’s largest
generators and a subsidiary of Zorlu Group
which is investing $8 billion into the establishment of a natural gas pipeline from Israel,
explained: “As of yet, we have seen little impact between the global pricing situation for
oil and gas and the Turkish market, though
we expect that this will soon change. Decreases in natural gas prices in many other
regions will enable the Turkish government
to better negotiate gas contracts with surrounding countries in the near future, especially with Israel, Iraq and Azerbaijan, which
seek to expand natural gas usage in Turkey.
In tandem with this, we will also see volumes of gas imported into Turkey increase.
This event, though, will only occur pending
changes to the regulatory framework of Turkey’s energy sector.”
Within a better connected energy market,
this would have already occurred. However,
the continued presence of the state in the
energy market has deterred these invest-
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Transmission tower manufactured by BTE Energy.
Photo courtesy of BTE Energy.
“A situation has emerged
whereby unlicensed
projects, because they
are subject to little
governance, have become
more attractive than
larger scale licensed
projects”
- Muzaffer Yosmaoğlu
former general manager,
Koç Holding
4
ments, in addition to those in generation. Of
particular concern has been the Turkish government’s continued role in electricity transmission and the impact that this has had on
infrastructure renewal and expansion. Elvan
Tugsuz Guven, general manager of Çiltuğ, a
leader in heavy manufacturing for Turkey’s
energy sector which also operates in generation through its subsidiary Tektuğ, explained:
“When market liberalization first began in
Turkey, we held great hope that we would
see an increase in greenfield investment,
especially for wind power projects. Even following the initial failures of the government
during the first tender process it executed
for wind licenses in 2007, we believed that
we would see the investments in transmission required to facilitate the expansion of
these projects made and dismissed the notion that this event indicated the nature of
the state’s involvement in the market. Having expanded into the construction of wind
towers in anticipation of these investments,
Çiltuğ has been sorely disappointed. TEİAŞ,
charged within managing Turkey’s electricity
transmission network, has yet to meet their
commitments to improving connectivity; our
energy infrastructure remains underdeveloped and many of the targets which the gov-
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ernment initially set for correcting this have
not been met. In addition, renewable energy
investors that made power house and transmission investments on behalf of TEİAŞ, have
been disappointed due to long years of connection investment offsetting. Issues associated with transmission continue to detract
from the feasibility of investments made into
generation as many, especially, in wind,
must either undertake the cost of these
expansions or otherwise see their ability to
supply power to the market limited by poor
infrastructure.”
Less obvious but equally powerful, the second vestige of the old regime is observed
in the way in which the legacy of the country’s bureaucracy has shaped the energy
sector’s project development and licensing
processes.
Dr. Rüçhan Bülent Hamamcı, deputy general
manager of Sancak Energy, which currently
holds four licenses for wind power projects,
explained how the regulatory structures governing licensing as handled by Turkey’s Energy Market Regulatory Authority (EMRA) have
halted the development of their site in Izmir:
“The way in which licenses are administered
in Turkey must be restructured. The current
licensing process requires that, in order to
even apply, investors must go back and forth
between as many as 30 agencies. Yet even
once licenses are administered, this does not
necessarily guarantee that one has a license
to operate. In the case of our project in Izmir,
though we have received a license, the development of our project has been halted by the
local community. The only recourse we have
had is in judicial proceedings. There must be
a department within EMRA to handle postpermitting issues. Especially in Izmir, these
situations are common. Post-tender support
is necessary and EMRA must develop as a
coordinating body – otherwise investors will
begin to turn away from the energy sector.”
However, perhaps posing a more direct
threat to the perceived stability of future investments in Turkey’s energy sector has been
TEİAŞ and its tender process for licensed
projects in renewable energy. Designed to
facilitate the development of large-scale renewable projects within Turkey, the system
employed by TEİAŞ has been characterized
by both poorly developed regulatory structures and erratic market behavior. These
problems first became evident in 2007, during the country’s first tender for wind energy
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where few of those that participated in the
tender were able to successfully develop projects because of the framework that TEİAŞ
had established to govern its bidding process. Though since 2007 the tender process
for renewable projects has been restructured, again earlier this year TEİAŞ executed
another tender which disconcerted investors,
this time in solar.
Gultekin Eranil, general manager of Boydak
Energy, a recent participant in TEİAŞ’ solar
tender, which plans to expend near $1 billion by 2017 to build its portfolio of assets
in generation, explained: “In calculating the
final bid price for our projects, we realized
that with our price the project stood at the
borderline of our project feasibility according
to our company assumptions and expectations. While we feel that we paid a relatively
high amount for our project, there were many
other participants that paid more, their bid
prices for connection rights of 1 MW were as
higher as cost of 1 MW PV Solar Power plant
investment The critical question is, these projects can be realized within 2-3 years?”
The effect of this has been to move investors to focus on unlicensed energy projects,
which, though originally intended for cogeneration, have seen their desirability grow owing both to the ease with which they allow investors to enter into energy trading and their
appeal as targets for license acquisition.
Muzaffer Yosmaoğlu, former general manager of Koç Holding, one of Turkey’s largest
energy generators, and current CEO of BioConstruct, which has executed the country’s largest investments in biomass energy
projects, said: “Generation in Turkey can be
divided into two categories of projects from
a regulatory perspective; licensed and unlicensed projects. This latter category was originally intended for cogeneration; there are no
laws governing these unlicensed projects.
They stand in a regulatory grey area. Our current problem is rooted in this. Imagine a farm
that wishes to develop a 1000 kW power project, but only uses 1/20th of this electricity
for its own uses. Because it is connected to
the grid, they are able to trade the remaining
electricity they generate. Licensing is an onerous, time-consuming process – land must be
rented, pre-licensing requirements must be
met, and then these projects must undergo
a public-bidding process, which, at least recently, has been characterized by exorbitant
pricing. Unlicensed projects are not subject
TURKEY POWER 2015 | PRE-RELEASE
to any of these conditions. Consequently, a
situation has emerged whereby these projects, because they are subject to little governance, have become more attractive than
larger scale licensed projects. An uneven
competitive structure has emerged and, as a
result, the original intent of these unlicensed
projects – cogeneration – has been lost, and
with it we have seen a great number of investors enter into the market either as a platform
for establishing either energy trading busi-
nesses or later selling their license.
‘This goes against the country’s regulatory structure. Law 6446 bans license-trade.
Through EMRA’s failure to govern these unlicensed power projects, unlicensed power
projects have now become so valuable that
many project licenses are now being traded.
This, of course, is not only unfair to those that
undergo the process to receive project licenses but also directly goes against the country’s
regulatory framework.’
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This issue, notably, has underscored the role which vested interests lectively, the legislative climate of Turkey is similar to that of the
continue to play in shaping the regulatory structures that govern Tur- European Union. The government has justified its position with
key’s energy sector. Yosmaoğlu, who recently petitioned Turkey’s en- past performance and there are few inconsistencies to be found in
ergy regulator for a redress of unlicensed energy projects, explained: policy making. Turkey offers no legal or legislative risks but the add“Upon bringing the issues associated with the lack of regulation of ed benefit of returns found only within emerging markets. That is
unlicensed projects and the attendant conflict that they create with the beauty of Turkey.”
Turkey’s legal system to the attention of EMRA, the regulator an- Mehmet Ali Neyzi, CEO, at STFA, one of Turkey’s largest distributors
nounced that a requirement would be imposed in line within the
of natural gas with significant holdings in generation, confirmed:
legislation governing fossil fuel fire cogeneration, that the
“Turkey has a vast population and low penetration for
proportion of electricity that could be traded would
energy. There is a huge growth potential in electricity
be limited to 40% of total unlicensed production.
and per capita usage of energy. With EMRA regulatLater, EMRA back-stepped, issuing a statement
ing the market, we will have more transparency.
stating that the size of these projects did not
The energy market is quite sophisticated, so
necessitate a regulatory framework. The rafor a foreign investor there is a great incentionale diving this: the Minister himself, many
tive to invest in Turkey. Turkey is an emerging
of the MPs, several heads of municipalities
market and it is easy to conduct business here
and figures within EMRA have applied for unas opposed to other developing countries. It
licensed projects.”
is a lucrative market with limited legal and fiSo why then, in spite of these many challenges,
nancial restraints.”
Dr. Zafer Demircan, Republic of
should Turkey attract investors? The answer to
The beauty of Turkey’s energy sector also rests
Turkey, general director
this is nuanced and lies in both the fundamentals
in that quality which has made the sector, at least
of energy
of Turkey’s energy market and the country’s political
initially, difficult to navigate: its market liberalization
and economic framework.
process. The early stages of market liberalization present
Turkey is a burgeoning energy market. Dr. Zafer Demircan, the investors with an opportunity to enter into segments of the market
Republic of Turkey’s general director of energy, said: “Economic that would otherwise, in more mature markets, possess high barriers
expansion, rising per capita income levels, positive demographic to entry. This is observed in the case of retail electricity distribution.
trends and the rapid pace of urbanization will continue to drive do- Historically controlled by the Turkish Electricity Distribution Commestic energy, which is expected to increase around 6% per annum pany (TEDAŞ), Turkey’s retail electricity market opened to investors
until 2023.”
through the tender of six distribution companies in 2010, since when
Indeed, Turkey offers a young population – the youngest of any Euro- several businesses have established themselves in the segment.
pean nation – and a GDP that the government projects will increase Among those was Bis Energy, which currently stands as the sector’s
by 4% in 2015 and 5% in 2016. Owing to this, the Government targets 6th most profitable business with revenue of ₤636 million in 2014
for energy generation to reach 120 gW by 2023. This will necessitate a through its 486 mW of generation capacity and which entered the
projected $110 billion of investment into the country’s energy secretail market through the establishment of its subsidiary, Bisen
tor. With the country currently indulging in several other
Energy, in 2011. Underscoring the company’s decision to
massive infrastructure projects, a large proportion
establish Bisen Energy were the lucrative prospects
of this capital must come from foreign markets. A
offered by a market just opening. Mesut Alparslan,
failure to court the foreign investor and develop
CEO of Bisen Energy, explained: “Market libera regulatory framework that is responsive to
alization presented our parent company, Bis
market participants, both foreign and domesEnergy, with an opportunity to enter a martic, could shackle the pace of the country’s
ket at a very early stage in its development.
growth. The government is thus expected to
The profits, and lack of competition, offered
respond.
by the retail electricity market, if compared
Beyond this though, the foreign investor must
against the institutional market for energy,
also place the challenges currently faced by the
are larger. Moreover, retail consumers show far
Mesut Alparslan, CEO,
country’s energy sector in context. The domestic
less sensitivity to energy prices than institutional
Bisen Energy
energy market of ten years ago - state-controlled
customers. While a discount of 1% might spur an inand highly regulated - was far different from the enstitutional consumer to switch accounts, the grounds
ergy market of today. Issues associated with the country’s
upon which energy retailers compete are more solid. The
natural gas market, its transmission system, and the energy sector’s sector also offers, comparatively, far less risk.”
licensing and tender process are not symptomatic of a country un- This is not to say that the impediments faced by Turkey’s energy secsure of the role of private sector participation in its development, but tor should not be given due consideration. The role that the governrather the nascence of its new institutional power structures. Should ment plays in addressing these structural issues will determine which
foreign investors seek further reassurance, they need only look to the path the country takes at its current juncture. Yet in opening its enercountry’s regulatory processes as a whole.
gy markets to investors ten years ago, the country already set its footFerhat Melik, board member at Vis Hydro, explained: “Taken col- work on the path of reform. For this, Turkey demands consideration.
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Photovoltaic module supplied by Tekno Ray Solar. Photo courtesy of Tekno Ray Solar.
Generation
Interest in renewables drive
generation in 2015
Currently standing as Europe’s sixth largest
economy, Turkey and its demand for electricity have expanded rapidly. Nearly doubling in the past 12 years, Turkish energy consumption increased from 132.6 tWh in 2002
to 255.5 tWh in 2014. Since 1990, consumption has grown by 4.6% per annum, a path
that the industry looks set to continue on until 2023 through which point in time annualized growth of 5% to 6% is expected. In 2023,
Turkey’s Ministry of Energy and Natural Resources predicts that total energy consumption could reach as high as 450 tWh.
This, of course, has necessitated investments in generation. Commencing with the
Ozan Korkmaz, partner,
APLUS
8
introduction of Turkey’s Energy Market Law
in 2001, which marked the don of market liberalization, total installed generation capacity has grown within the country from 31,900
mW in 2012 to 69,500 mW in 2014. Totaling
6,000 mW per annum over the past three
years, these investments have been executed almost exclusively by the private sector
through expanding the country’s network of
natural gas power plants and hydroelectric
power dams. The story of Turkey’s energy
sector of today begins herein.
Oil and gas-poor, Turkey is seeking to correct
its heavy dependence on foreign supplies
of natural gas and its attendant foreign account deficit through expanding domestic
generation of energy through renewable
resources. This has been backed by a decline in the desirability of natural gas-fire
power plants.
Ozan Korkmaz, partner at APLUS, an energy
investment and technology consultancy
operating within the domestic market said:
“At the moment there is little demand for
additional natural gas power plants in Turkey, similarly to the situation in Europe.
Within the feasibility studies that APLUS has
conducted over the course of the past year,
we have continually seen that newly
constructed natural gas fire power plants are
not profitable.”
With the country’s potential for hydroelectric
power generation all but saturated at 23,600
mW, this will necessitate investment in new
fields of energy.
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Solar
Turkey’s still dormant solar industry has
been the subject of fervent market speculation of late. Sun-rich, the country shows tremendous potential for solar energy production. The Turkish government targets raising
$7 billion of investment for the sector over
the course of the next years, the product of
which, it hopes, will be a minimum of 3,000
mW of solar energy production.
Extending from this goal and the Turkish government’s larger ambition of meeting 30% of
its domestic energy needs through renewable energy generation by 2023, the Turkish
Electricity Transmission Company (TEİAŞ) is
expected to allocate 600 mW of solar energy
production licenses in 2015. This will be done
through several rounds of license tenders.
Announced in January of this year, the first
of these rounds was completed earlier last
month. Noted for the exorbitant price paid
by winning participants, which, for some projects, stood at an amount greater than the
cost of plant construction, the prices paid for
these licenses led to speculation that these
investments were driven more by pride than
practicality.
Mehmet Ozenbos, the sales and marketing
manager of Tekno Ray Solar, a JV between
Turkish Tekno, and Italian Enerray, which
supplies solar systems to the Turkish market
explained: “Solar is a relatively new field for
Turkey. The recent tender executed by TEIAS
was a landmark event; it represented the
first time that many had the opportunity to
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“We have great wind
potential in Turkey;
25% to 30% more than
the European average”
- Mustafa Serdar Ataseven,
president, Turkish Wind
Energy Association
participate in the sector. This drove many,
especially those from outside of the energy
industry, to drive up the prices of project licenses, for reasons that to many members
of the investment community were unclear.
The industry is now left to wonder after ten
years how many of these projects will have
actually materialized.”
Foreign market participants in the tender
included German Belectric, whose projects
will have a proposed AP connection capacity
of 32.4 mW, and American thin-film specialist First Solar, who will seek to produce 19
mW. Though those projects that enter into
production prior to 2020 will receive a feedin tariff of $133/mW, with 3,000 mW of solar
licenses that have yet to be tendered, in all
likelihood, this first round of solar tenders
will be the highest prices that the market
will see.
Wind
Tracing its roots back to 2006, when the
country established its first swath of wind
turbines, wind energy production in Turkey
has grown quickly from its recent begin-
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Wind farm. Zorlu Energy is currently
constructing Turkey’s largest wind farm
in Osmaniye. Photo courtesy of Zorlu Energy.
nings. Today, the Turkish Ministry of Energy
and Natural Resources estimates current
installed generation capacity to stand at 3.6
gW, which, owing to Turkey’s climate and position relative to the European market, could
grow rapidly.
Mustafa Serdar Ataseven, president of the
Turkish Wind Energy Association, said: “We
have great potential in Turkey; 25% to 30%
more than the European average. In Europe,
one wind park works at about 2,000 to 2,500
hours per year. In Turkey, our wind parks
work more than 3,500 hours per year. In addition, the European market is saturated with
wind projects. This has aided us. Our industry target is 20,000 mW by 2023. We have an
11,000 mW in project stock.”
For this the Government seeks to attract $22
billion in new investment by 2023, a large
portion of which it could realize through the
country’s April wind tender. The second of
two wind license tender processes that the
Turkish Electricity Transmission Cooperation
(TEİAŞ) will execute, April’s tender represents
a landmark event for the country. Murat
Çolakoğlu, partner at PriceWaterhouseCoopers, said: “At the end of April, the Turkish
government will embark on the selection
process for what will be the country’s largest
volume renewable tender. This tender has
proven to be very attractive. Over 600 companies have invested in the bid process, for
which they were required to conduct basic
engineering, including the construction of
towers for the purpose of making measurements related to weather and wind-power.
In part developed to preempt license-sellers,
additional pre-requisites included letters of
guarantee, letters of commitment, and the
satisfaction of a pre-licensing process. Following the selection process, winning bidders will be required to proceed with project
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PwC Deal Review: Deals for real
Murat Çolakoğlu, partner, PwC Turkey, energy utilities & mining industry
territory leader
With 40 deals, 2014 was on par with 2013 in
terms of deal numbers. On the other hand, it
was a much slower year than 2013 in terms
of deal value; the total deal value in 2014 was
$5.6 billion compared to $7.1 billion in 2013.
The deals became smaller in size, averaging $140 million as opposed to $176 million
in 2013.
34 deals took place in the utilities segment.
The privatization of thermal coal power
plants and the associated mines made up
most of the total utilities deal value. Similarly to 2013, smaller private deals targeting
renewable energy companies in particular,
signaled the continuation of healthy activity in this segment. A few novelties were the
private deals involving thermal power generation assets and also a share sale in a natural
gas distribution portfolio. On the other hand,
as opposed to expectations, no improvement
has been posted to date in the expected AfsinElbistan B deal.
Although the deal number doubled and the
total deals value increased in the oil and gas
sector in 2014, these are still a fraction of total figures. In three of these deals the acquirer
was the same and was supposedly aiming to create a fuel distribution portfolio. In
another deal gradual share acquisitions finally resulted in full ownership of Turkey’s
second refinery by SOCAR.
Transmission tower at sunset.
Photo courtesy of Pixabay.
Utilities led
Utilities retained their lead in the energy deals
landscape in 2014 with 34 deals amounting to
$5.5 billion.
Privatization tenders were completed for six
thermal power plant assets, together with
the operational rights for the feeding mines.
Notably, all failed to attract foreign interest,
mainly due to the fact that all the thermal
assets have already completed half their asset life and run at very low efficiency rates. In
addition, the calorific value of the mines is
quite low.
Acquisitions of thermal assets by local companies displayed similar motives. With vertical integration in mind, IC ICTAS Holding,
which holds electricity distribution and supply licenses in the Thrace region, offered $2.7
billion, the highest overall deal value of the
year, for the bundled package of the Yenikoy
(2 x 210 mW) and Kemerkoy (3 x 210 mW) lignite power plants.
Likewise, Elsan Elektrik placed the highest
bid, $1.1 billion, for the Yatagan lignite power
plant (3 x 210 mW), to support its parent company Bereket Energy’s electricity distribution
and supply business in the same region.
A different vertical integration story was aborted due to lack of financing in the case of the
Catalagzi coal power plant (2 x 150 mW). Local mining company Demir Madencilik, which
also supplies hard coal to the plant, placed
the highest bid, $351 million, for a potential
vertical integration. However, due to failure to
finance by the deadline, the Privatization Administration passed the tender award to the
second highest bidder, Elsan Elektrik, which
offered $350 million.
The last tender of the year was for another
bundled package, the Orhaneli (210 mW)
and Tuncbilek (1 x 65 mW + 2 x 150 mW) lignite power plants, which ended with Celikler
Holding placing the highest bid, $521 million. The same company also won the Seyitomer lignite power plant (4 x 150 mW) tender
in 2012.
Despite the reported foreign interest in
“Utilities retained their lead in
the energy deals landscape in
2014 with 34 deals amounting
to $5.5 billion”
- Murat Çolakoğlu, Partner,
PwC Turkey, Energy Utilities
& Mining Industry Territory
Leader
Afsin-Elbistan B assets, there was no deal progress in 2014.
Continuing with the state hydro power plants,
the operational rights of 10 of them were
transferred to the private sector, again all to
local bidders. They received surprisingly high
bids, $2.5 million per mW on average, despite
their small sizes. This once again underlined
the fact that acquisition of these operating
assets is still more favorable than licensing of
greenfield investments.
The rest of the deals in power generation involved renewable energy assets. The acquisition of a 45% share in Polat Enerji by the
Canadian Public Sector Pension Fund (PSPCanada’s largest) was significant. Accordingly,
we assume that the 10-year feed-in tariff system must have proven reliable to such a large
pension fund seeking a steady income. On the
other hand, the regulatory enforcement in the
wind market threatening the inactive players
with license cancellation did not ignite many
transactions or much consolidation in order
to create resources to go ahead with projects.
The launch of the long-awaited licensing tenders in the solar power segment failed to end
in a deal rush. We believe that this was due
to the unreasonably high differential between
the per-mW bids, which went beyond what
could be compensated for by the feed-in-tariff
and added to uncertainty about profitability.
Having said that, the unlicensed solar power
market (<1 mW) is seemingly more vibrant
and might have hosted some deals among
the small players, which are not made publicly available. •
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administration, including providing capital commitments and guar- currently produces 95mW of energy. Commissioned in 2013, the
Gümüşköy Geothermal Power Plant is Turkey’s second geothermal
antees as well as detailed engineering studies.”
To some, especially early participants in the market, this may come generation facility and is owned by BM Geothermal Power, a subsidiary
as a surprise. Famously, in 2007, during TEİAŞ’ first wind license ten- of BM Holding, and has total installed generation capacity of 13.2mW
der, the country received over 75 gW of license applications in one divided between two units.
Possessing by some estimates as much as much as 4.5gW of theoday, owing to few limitations imposed on license applicants,
retical potential, geothermal in Turkey, and interest in it, is
the result of which was what many in the industry have
on the rise.
come to refer to as a Gregorian knot of investments.
Joseph Bonafin, sales manager for geothermal apThough many projects received licenses, all but
plication at Turboden, a pioneer in the field of
a few of these projects were unfeasible. ConseOrganic Rankine Cycle (ORC) technology which
quently, many license winners, unable to reenables its user to exploit otherwise unusceive project financing, were forced to return
able geothermal and steam resources, said:
their licenses.
“Recently we have noticed a sharp increase
While in response to this, EMRA, Turkey’s enin interest in the development of larger scale
ergy market regulator, has developed a stringeothermal projects using ORC technology
gent pre-licensing application process, with
in Turkey, marked by the entrance of outside
over 600 applications it is unclear how many of
Sinan Ak, general manager,
investors from even very well established energy
these project’s the industry may see materialize.
Zorlu Energy
markets such as the United States. This, I believe, is
However, should the country’s wind tender process
attributable to the maturation of the Turkish market for
resemble the recent solar license auction, participants
geothermal. Today we believe that Turkey has strong potenwill be aided by a feed-in tariff structure which will grant
$73/mWh. Of additional benefit to some, wind power projects devel- tial for geothermal energy: scientifically speaking, thousands of mWs.
oped using locally manufactured towers and blades will be eligible The ability of the country to transform this potential into generation,
for an additional feed-in tariff, which would bring the market price of however, will be checked by both the resources available domestically and the readiness of the market. For these reasons we expect that
their energy to $87/mWh.
by 2020 we will see 1,500 MW of geothermal energy realized, both from
traditional flash processes and ORC cycles. We expect annualized
Geothermal
Representing a far smaller portion of Turkey’s energy matrix than wind growth of 200 MW.”
or even solar, geothermal energy is a new frontier for Turkish energy, a Among those to invest in the development of geothermal energy infrontier that could, within the coming eight years, come to play a great- clude Zorlu Energy. Sinan Ak, general manager of Zorlu Energy, exer role in power generation than previously anticipated. This is rooted plained: “In 2012 Zorlu Energy embarked on a new investment regime.
in both Turkey’s still fledgling potential for these projects and the intro- In the last two years this has resulted in two projects: a wind project
duction of new technology which will enable Turkish energy generators in Pakistan and a geothermal project in Turkey. Within the next two to
three years, we would like to expand production of renewable energy
to better use existing resources.
Though geothermal energy exploration first began in Turkey in the every year by 100-150MW, raising total production capacity to over 300
1960s, the country’s first geothermal facility, the Kızıldere Geother- MW for geothermal, 250 MW for wind and 250 MW for hydro, and total
mal Power Plant, entered into generation in the 1980s. Today owned production for Zorlu Energy, including both domestic and internationby Zorlu Energy, one of Turkey’s largest generators, which, in the next al sites, to 1600 MW, with over 800 MW of renewable capacity in Turkey.”
three years will grow its total energy portfolio to include 1,600mW of Should others aside from Zorlu begin to eye these projects, Turkey
installed capacity, the Kızıldere Geothermal Power Plant, the largest could see geothermal energy production play a far greater role in doof the country’s two operating geothermal energy production plants, mestic energy production than previously expected.
Geothermal power plant. Turkey anticipates generating 600mW of geothermal energy by 2023. Photo courtesy of Zorlu Energy.
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Turkey, Turkish Stream and Market Liberalization
Transparency and market reform in the wake of Turkish Stream
Energy has long been the currency in which
regional power is brokered, perhaps nowhere
more so than in Europe. Sixty years ago, when
Europe was utterly divided during World War
II, Turkey, then a fledgling republic lacking
in any known hydrocarbon resources, stood
largely politically neutral; a position made
possible because it lacked one of the most
strategic prizes for the belligerents in the European theater: oil. Instead, in 1941, when
Hitler launched Operation Barbarossa and
invaded the Soviet Union, attention turned
east to Baku, which was the focus of Soviet
oil production and offered a lifeline to the
Third Reich in its quest to procure enough oil
to sustain its military campaigns. Turkey, in
spite of its strategic geopolitical position, was
inconsequential.
Far be it from the case today. Turkey is still
energy poor but, due south of Crimea, it has
seen its relevance – and Ankara’s clout – grow
rapidly over the past year as a transit state
that straddles the geographical and ideological precipices of Europe, the Middle East and
Russia. Turkish Stream, Gazprom’s proposed
pipeline alternative to the recently cancelled
South Stream through Ukraine, could help
Russia remain Europe’s predominant supplier of natural gas. The pipeline is slated to carry 63 billion cubic meters of gas through the
Black Sea to Turkey before then connecting
to Southeastern Europe. Geopolitics, though,
have overshadowed what could be one of the
most interesting macroeconomic and political consequences of the project: a rewiring of
the region’s energy framework through Anatolia, and through it, the structural reform of
Turkey’s energy sector.
To Turkey, the idea of becoming an energy
hub has long seemed a pipedream. Hosting
one of the world’s most quickly expanding
electricity markets and one of the world’s
most import-dependent energy sectors (98%
of Turkey’s natural gas, which accounts for
the lion’s share of total power generation, is
imported), the aspiration that Turkey might
one day become energy self-sufficient remains far out of reach.
In fact, the larger effect that Turkish Stream
could have on the Turkish energy sector may
be in its transformative quality. A state-controlled market until but ten years ago, Tur-
key’s power sector has privatized rapidly; yet
BOTAŞ, the state-run organization charged
with managing the country’s oil and natural
gas pipeline network, continues to hold monopoly rights over the import and sale of natural gas. The most immediate consequence
of this has been the delayed expansion of
one of the most fundamental structures of
Turkey’s energy industry: its pipeline network.
While in the past decade, Turkey has discussed the construction of additional pipelines from numerous locales – Azerbaijan,
Iran, Iraq, and Israel – each of these projects
has failed to materialize because of the lack
of private sector involvement.
On a more fundamental level, Turkey lacks
transparency as an energy market, which is a
legacy of the state’s historical involvement in
the market, and is reflected in energy pricing.
Obahan Obaoğlu, secretary general of EUD,
the Electricity Producer’s Association, said:
“Price remains one of the core issues of the
Obahan Obaoğlu, secretary general,
EUD, Electricity Producer’s
Association
sector: the pricing system is very vague and
there is a lack of transparency; it is impossible to predict future pricing or to talk about
a liberal pricing system at the moment. For
this reason, prices are not based on the actual cost of production; they are based on
estimates.”
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For this, Turkish Stream could be a point of
inflection, indirectly spurring a reconsideration of the structures that underpin Turkish
energy. Though Turkey would only receive
transit fees and be unable to re-export Russian gas, the success of a project of Turkish
Stream’s scale and the continued expansion
of domestic energy generation require a
mature energy market. The development of
technical talent, market transparency, storage facilities and the ability to forecast prices
are necessary for Turkish Stream to succeed.
And though non-gas investments in Turkish energy have continued to grow, this has
been has been at the hands of domestic investors. Significant foreign participation has
remained limited to two companies operating in generation today: CEZ Group (Czech
Republic) and E.ON (Germany), both of
which operate through local partnerships. If
the Turkish government wants to realize the
estimated $120 billion that will be required
to meet its Centennial Goals for the energy
sector in 2023, much of this funding must
come from foreign markets. Already domestic investors and financial institutions have
reached their financial limit.
Both functionally and symbolically, the death
of BOTAŞ – or at least a reconsideration of
its role in Turkey’s energy sector – would
help enable the private sector to play
a role in the maturation of the country’s gas
industry and, perhaps more importantly,
bolster much needed foreign investor
confidence about investing in Turkish energy.
To be clear, this would be an extremely
involved process. BOTAŞ is vertically integrated and plays an important role in the pricing
of other utilities, making its debundling,
at least immediately, an unrealistic policy
goal. Far more feasible would be the introduction of a more transparent system of
energy pricing.
Earlier this year EPDK, Turkey’s energy regulator, finalized the establishment of EPIAS,
Turkey’s new energy trading platform. This
represents an important step in market liberalization for Turkey. However, what will
come both in the lead up to and the immediate wake of Turkish Stream could very well
determine Turkey’s ability to realize its
energy ambitions. •
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Final Thoughts
Industry Leaders speak out
“Turkey’s goals for its energy sector are an extension
of a larger ambition: to stand
among the world’s ten largest
economies by 2023. This will
necessitate over $1 trillion in
trading volume; almost $500
million in exports; and will
require that the energy sector
expand domestic generation
by 30,000MW. The ability of
Turkey to realize these goals,
though, is far more complicated
than just expanding generation. Turkey will need to renew a
great deal of its current energy
production capacity: many
state-owned assets, both for
natural gas and coal, are old
and inefficient. Privatization of
these assets will be very tough
considering the condition of
these assets and potential availability of financing.
As a whole, Turkey’s ability to
realize its goals for its energy
sector will depend on financing.
Turkey requires a substantial
amount of capital – within energy, but also within infrastructure. Investment opportunities
will be limited; though lending
in Europe will improve, the US
Federal Reserve will tighten its
monetary policy. Attributable
to the financial climate, Turkey
will have very hard time to realize many of its goals for the sector, if some of these fundamentals do not change over time.”
- Mustafa Karahan,
Deputy Chairman,
ETD
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“Turkey strives to become a regional energy hub. Our geopolitical
position aids us in this. Turkey has a vast domestic market and rapidly expanding domestic energy needs. Demand and supply are both
here. However, the market needs to be liberalized and well functioning, with transparent and cost reflective pricing. This has almost fully
been attained within the power industry. Within the gas industry,
much still has yet to be achieved. Be this as it may, there is a
great opportunity for Turkey within gas, given declining oil prices. As regulators, we have to focus on the
domestic market with an emphasis on gas and oil.
Our position as a nation, and energy market, will play
an important role in developing this.”
- Alparslan Bayraktar, Commissioner,
EMRA
Thank you,
We would also like to sincerely
thank all the governmental bodies and associations, that took
the time to give their insights
into the market and share their
experience and knowledge:
Republic of Turkey Ministry of Energy
and Natural Resources
www.enerji.gov.tr
Electricity Producers Association (EUD)
http://www.eud.org.tr/
“Within the sector itself, there is optimism. There is this ambition to
connect Turkey to Europe, both physically—to make it possible for
cross-border trade—and with regard to emulating European business
practices. There are positive signals that the industry is moving in
the correct direction. Most of the industry’s fundamental issues have
been addressed; however, it is undisputable that the sector requires
greater transparency and greater levels of cohesiveness between what
are, at present, very disjointed regulatory bodies. When one engages
a government entity individually, it is apparent that the
country’s regulators are competent: they possess insight. The largest challenge for the industry, however, is found in creating a fluid, well-functioning
system of regulation. A failure to do so will only
slow the industry down.”
Energy Traders Association (ETD)
http://www.etd.org.tr/
Turkish Wind Energy Association
(TUREB)
http://www.tureb.com.tr
Alice Pascoletti
Project Director
JP Stevenson
Journalist
Global Business Reports
- Olav Peter Hypher, Country Manager,
Statkraft
“If one is to look to the past, Turkey has succeeded in many transformations, especially if compared against many of our neighbors in
Eastern Europe. Our market system has evolved, as have the regulatory structures governing the industry – greatly. Turkey's promise
and challenge is rooted in the attribute that sets it apart from these
other regional energy markets: our size. The Turkish market energy
stands as large as the entirety of Southeastern Europe. It is therefore
because of this that the changes made to the industry have such
a far-reaching effect: these changes compound. It is also therefore
because of this that it is of such importance that the Turkish government chooses the right approach in developing the country’s energy
market: for the ability of Turkey to fortify its production base,
and through this, the economy. Though we predict several
years of energy surplus, in 2018 this will change. Investments made in this current period, when much from a
regulatory perspective remains in flux, will determine our
ability as a country to meet our ambitions. Regulators
would do best to tread lightly on the sector.”
- Cem Asik, General Manager,
Sanko
Turkey Power 2015
Journalist: JP Stevenson
Project Director: Alice Pascoletti
Regional Director, EMEA: Sharon Saylor
General Manager: Agostina Da Cunha
Senior Partner: Mungo Smith
Graphic Designer: Leigh Johnson
Cover image: Courtesy of Zorlu Energy
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